Master the Market with Confidence_5 ppt

potential to be threatening also has the potential to be blocked, distorted, or diminished in significance
by our pain-avoidance mechanisms.
It's this particular characteristic of the way our minds function that can really do us a disservice. As
traders, we can't afford to let our pain-avoidance mechanisms cut us off from what the market is
communicating to us about what is available in the way of the next opportunity to get in, get out, add
to, or subtract from a position, just because it's doing something that we don't want or expect. For
example, when you're watching a market (one you rarely, if ever, trade in) with no intention of doing
anything, do any of the up or down tics cause you to feel angry, disappointed, frustrated, disillusioned,
or betrayed in any way? No! The reason is that there's nothing at stake. You're simply observing
information that tells you where the market is at that moment. If the up and down tics that you're
watching form into some sort of behavior pattern you've learned to identify, don't you readily recognize
and acknowledge the pattern? Yes, for the same reason: There's nothing at stake.
There is nothing at stake because there's no expectation. You haven't projected what you believe,
assume, or think you know about that market into some future moment. As a result, there's nothing to
be either right about or wrong about, so the information has no potential to take on a threatening or
negatively charged quality. With no particular expectation, you haven't placed any boundaries on how
the market can express itself. Without any mental boundaries, you will be making yourself available to
perceive everything you've learned about the nature of the ways in which the market moves.
There's nothing for your pain-avoidance mechanisms to exclude, distort, or diminish from your
awareness in order to protect you. In my workshops, I always ask participants to resolve the following
primary trading paradox: In what way does a trader have to learn how to be rigid and flexible at the
same time? The answer is: We have to be rigid in our rules and flexible in our expectations. We need to
be rigid in our rules so that we gain a sense of self-trust that can, and will always, protect us in an
environment that has few, if any, boundaries. We need to be flexible in our expectations so we can
perceive, with the greatest degree of clarity and objectivity, what the market is communicating to us
from its perspective. At this point, it probably goes without saying that the typical trader does just the
opposite: He is flexible in his rules and rigid in his expectations. Interestingly enough, the more rigid
the expectation, the more he has to either bend, violate, or break his rules in order to accommodate his
unwillingness to give up what he wants in favor of what the market is offering.

ELIMINATING THE EMOTIONAL RISK

To eliminate the emotional risk of trading, you have to neutralize your expectations about what the
market will or will not do at any given moment or in any given situation. You can do this by being
willing to think from the markets perspective. Remember, the market is always communicating in
probabilities. At the collective level, your edge may look perfect in every respect; but at the individual
level, every trader who has the potential to act as a force on price movement can negate the positive
outcome of that edge. To think in probabilities, you have to create a mental framework or mind-set that
is consistent with the underlying principles of a probabilistic environment. A probabilistic mind-set
pertaining to trading consists of five fundamental truths.

1. Anything can happen.
2. You don't need to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an
edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over
another.
5. Eveiy moment in the market is unique.

Keep in mind that your potential to experience emotional pain comes from the way you define and
interpret the information you're exposed to. When you adopt these five truths, your expectations will
always be in line with the psychological realities of the market environment. With the appropriate
expectations, you will eliminate your potential to define and interpret market information as either
painful or threatening, and you thereby effectively neutralize the emotional risk of trading. The idea is
to create a carefree state of mind that completely accepts the fact that there are always unknown forces
operating in the market. When you make these truths a fully functional part of your belief system, the
rational part of your mind will defend these truths in the same way it defends any other belief you hold
about the nature of trading.
This means that, at least at the rational level, your mind will automatically defend against the idea or
assumption that you can know for sure what will happen next. It's a contradiction to believe that each
trade is a unique event with an uncertain outcome and random in relationship to any other trade made

in the past; and at the same time to believe you know for sure what will happen next and to expect to be
right. If you really believe in an uncertain outcome, then you also have to expect that virtually anything
can happen. Otherwise, the moment you let your mind hold onto the notion that you know, you stop
taking all of the unknown variables into consideration. Your mind won't let you have it both ways. If
you believe you know something, the moment is no longer unique.
If the moment isn't unique, then everything is known or knowable; that is, there's nothing not to know.
However, the moment you stop factoring in what you don't or can't know about the situation instead of
being available to perceive what the market is offering, you make yourself susceptible to all of the
typical trading errors. For example, if you really believed in an uncertain outcome, would you ever
consider putting on a trade without defining your risk in advance? Would you ever hesitate to cut a
loss, if you really believed you didn't know? What about trading errors like jumping the gun? How
could you anticipate a signal that hasn't yet manifested itself in the market, if you weren't convinced
that you were going to miss out? Why would you ever let a winning trade turn into a loser, or not have
a systematic way of taking profits, if you weren't convinced the market was going your way
indefinitely? Why would you hesitate to take a trade or not put it on at all, unless you were convinced
that it was a loser when the market was at your original entiy point? Why would you break your money
management rules by trading too large a position relative to your equity or emotional tolerance to
sustain a loss, if you weren't positive that you had a sure thing? Finally, if you really believed in a
random distribution between wins and losses, could you ever feel betrayed by the market? If you
flipped a coin and guessed right, you wouldn't necessarily expect to be right on the next flip simply
because you were right on the last.
Nor would you expect to be wrong on the next flip if you were wrong on the last. Because you believe
in a random distribution between the sequence of heads and tails, your expectations would be perfectly
aligned with the reality of the situation. You would certainly like to be right, and if you were that
would be great, but if you were wrong then you would not feel betrayed by the flip, because you know
and accept that there are unknown variables at work that affect the outcome. Unknown means "not
something your rational thinking process can take into consideration in advance of the Hi-r" ?jXCi>v'L
^ fu!Iv accept that you don't know As a result, there is little, if any, potential to experience the kind of
emotional pain that wells up when you feel betrayed. As a trader, when you're expecting a random
outcome, you will always be at least a little surprised at whatever the market does— even if it conforms

exactly to your definition of an edge and you end up with a winning trade. However expecting a
random outcome doesn't mean that you can't use your full reasoning and analytical abilities to project
an outcome, or that you can't guess what's going to happen next, or have a hunch or feeling about it,
because you can. Furthermore, you can be right in each instance.
You just can't expect to be right. And if you are right, you can't expect that whatever you did that
worked the last time will work again the next time, even though the situation may look, sound, or feel
exactly the same. Anything that you are perceiving "now" in the market will never be exactly the same
as some previous experience that exists in your mental environment. But that doesn't mean that your
mind (as a natural characteristic of the way it functions) won't try to make the two identical. There will
be similarities between the "now moment" and something that you know from the past, but those
similarities only give you something to work with by putting the odds of success in your favor. If you
approach trading from the perspective that you don't know what will happen next, you will circumvent
your mind's natural inclination to make the "now moment" identical to some earlier experience.
As unnatural as it seems to do so, you can't let some previous experience (either negative or extremely
positive) dictate your state of mind. If you do, it will be very difficult, if not impossible, to perceive
what the market is communicating from its perspective. When I put on a trade, all I expect is that
something will happen. Regardless of how good I think my edge is, I expect nothing more than for the
market to move or to express itself in some way. However, there are some things that I do know for
sure. I know that based on the markets past behavior, the odds of it moving in the direction of my trade
are good or acceptable, at least in relationship to how much I am willing to spend to find out if it does. I
also know before getting into a trade how much I am willing to let the market move against my
position. There is always a point at which the odds of success are greatly diminished in relation to the
profit potential. At that point, it's not worth spending any more money to find out if the trade is going
to work. If the market reaches that point, I know without any doubt, hesitation, or internal conflict that I
will exit the trade.
The loss doesn't create any emotional damage, because I don't interpret the experience negatively. To
me, losses are simply the cost of doing business or the amount of money I need to spend to make
myself available for the winning trades. If, on the other hand, the trade turns out to be a winner, in most
cases I know for sure at what point I am going to take my profits. (If I don't know for sure, I certainly
have a veiy good idea.) The best traders are in the "now moment" because there's no stress. There's no

stress because there's nothing at risk other than the amount of money they are willing to spend on a
trade. They are not trying to be right or trying to avoid being wrong; neither are they trying to prove
anything. If and when the market tells them that their edges aren't working or that it's time to take
profits, their minds do nothing to block this information. They completely accept what the market is
offering them, and they wait for the next edge. CHAP
TER 8
CHAPTER 8

WORKING WITH YOUR BELIEFS

Now the task before you is to properly integrate the five fundamental truths presented in Chapter 7 in
your mental environment at a functional level. To help you do that, we will take an in-depth look at
beliefs—their nature, properties, and characteristics. However, before we do that I will review and
organize the major concepts presented thus far into a much clearer and more practical framework. What
you learn from this and the next two chapters will form the foundation for understanding everything
you need to do to achieve your goals as a trader.

DEFINING THE PROBLEM

At the most fundamental level, the market is simply a series of up and down tics that form patterns.
Technical analysis defines these patterns as edges. Any particular pattern defined as an edge is simply
an indication that there is a higher probability that the market will move in one direction over the other.
However, there is a major mental paradox here because a pattern implies consistency, or, at least, a
consistent outcome. But the reality is each pattern is a unique occurrence. They may look (or measure)
exactly the same from one occurrence to the next, but the similarities are only on the surface. The
underlying force behind each pattern is traders, and the traders who contribute to the formation of one
pattern are always different from the traders who contribute to the next; so the outcome of each pattern
is random relative to one another.
Our minds have an inherent design characteristic (the association mechanism) that can make this
paradox difficult to deal with. Now these edges, or the patterns they represent, flow by in every time

frame, making the market a never-ending stream of opportunities to get in, get out (scratch a trade),
take profits, cut losses, or add to or detract from a position. In other words, from the market's
perspective, each moment presents each one of us traders with the opportunity to do something on our
own behalf.

DEFINING THE TERMS

What prevents us from perceiving each "now moment" as an opportunity to do something for ourselves
or to act appropriately even when we do? Our fears! What is the source of our fears? We know its not
the market, because from the market's perspective, the up and down tics and the patterns they create are
neither positively or negatively charged.
As a result, the up and down tics themselves have no capacity to cause us to enter into any particular
state of mind (negative or positive), lose our objectivity, make errors, or take us out of the opportunity
flow. If it's not the market that causes us to experience a negatively charged state of mind, then what
does cause it? The way we define and interpret the information we perceive. If that's the case, then
what determines what we perceive and how we define and interpret that information? What we believe
or what we assume to be true. Our beliefs working in conjunction with the association and pain-
avoidance mechanisms act as a force on our five senses, causing us to perceive, define, and interpret
market information in a way that is consistent with what we expect. What we expect is synonymous
with.what we believe or assume to be true. Expectations are beliefs projected into some future moment.
Each moment from the market's perspective is unique; but if the information being generated by the
market is similar in quality, properties, or characteristic to something that is already in our minds, the
two sets of information (outside and inside) automatically become linked. When this connection is
made, it triggers a state of mind (confidence, euphoria, fear, terror, disappointment, regret, betrayal,
etc.) that corresponds to whatever belief, assumption, or memory the outside information was linked.
This makes it seem as if what is outside is exactly the same as whatever is already inside of us. It's our
state of mind that makes the truth of whatever we're perceiving outside of us (in the market) seem
indisputable and beyond question.
Our state of mind is always the absolute truth. If I feel confident, then I am confident. If I feel afraid,
then I am afraid. We can't dispute the quality of energy flowing through our mind and body at any

given moment. And because I know as an indisputable fact how I feel, you could say that I also know
the truth of what I'm perceiving outside of me in the same moment. The problem is that how we feel is
always the absolute truth, but the beliefs that triggered our state of mind or feeling may or may not be
true relative to the possibilities that exist in the market at any given moment. Recall the example of the
boy and the dog.
The boy "knew" for an absolute fact that each dog he encountered after the first was threatening,
because of the way he felt when one came into his field of awareness. These other dogs did not cause
his fear; his negatively charged memory working in conjunction with the association and his pain-
avoidance mechanism caused his fear. He experienced his own version of the truth, although that did
not correspond with the possibilities that existed from the environment's perspective. His belief about
the nature of dogs was limited relative to the possible characteristics and traits expressed by dogs. Yet
the state of mind he experienced eveiy time he encountered a dog caused him to believe thats he
"knew" exactly what to expect from them.
This same process causes us to believe that we "know" exactly what to expect from die market, when
the reality is there are always unknown forces operating at every moment. The trouble is, the instant we
think we "know" what to expect, we simultaneously stop taking all the unknown forces and die various
possibilities created by those forces into consideration. The unknown forces are other traders waiting to
enter or exit trades, based on their beliefs about the future. In other words, we really can't know exactly
what to expect from the market, until we can read the minds of all the traders who have the potential to
act as a force on price movement. Not a very likely possibility. As traders, we can't afford to indulge
ourselves in any form of "I know what to expect from the market." We can "know" exactly what an
edge looks, sounds, or feels like, and we can "know" exactly how much we need to risk to find out if
that edge is going to work.
We can "know" that we have a specific plan as to how we are going to take profits if a trade works. But
that's it! If what we think we know starts expanding to what the market is going to do, we're in trouble.
And all that's required to put us into a negatively charged, "I know what to expect from the market"
state of mind is for any belief, memoiy, or attitude to cause us to interpret the up and down tics or any
market information as anything but an opportunity to do something on our own behalf.
What Are the Objectives? Ultimately, of course, making money is everyone's objective. But if trading
were only a matter of making money, reading this book wouldn't be necessary. Putting on a winning

trade or even a series of winning trades requires absolutely no skill. On the other hand, creating
consistent results and being able to keep what we've created does require skill. Making money
consistently is a by-product of acquiring and mastering certain mental skills. The degree to which you
understand this is the same degree to which you will stop focusing on the money and focus instead on
how you can use your trading as a tool to master these skills.
What Are the Skills? Consistency is the result of a carefree, objective state of mind, where we are
making ourselves available to perceive and act upon whatever the market is offering us (from its
perspective) in any given "now moment."
What Is a Carefree State of Mind? Carefree means confident, but not euphoric. When you are in a
carefree state of mind, you won't feel any fear, hesitation, or compulsion to do anything, because
you've effectively eliminated the potential to define and interpret market information as threatening. To
remove the sense of threat, you have to accept the risk completely. When you have accepted the risk,
you will be at peace with any outcome. To be at peace with any outcome, you must reconcile anything
in your mental environment that conflicts with the five fundamental truths about the market. What's
more, you also have to integrate these truths into your mental system as core beliefs.
What Is Objectivity? Objectivity is a state of mind where you have conscious access to everything
you have learned about the nature of market movement. In other words, nothing is being blocked or
altered by your painavoidance mechanisms.
What Does it Mean to Make Yourself Available? Making yourself available means trading from the
perspective that you have nothing to prove. You aren't trying to win or to avoid losing. You aren't
trying get your money back or to take revenge on the market. In other words, you come to the market
with no agenda other than to let it unfold in any way that it chooses and to be in the best state of mind
to recognize and take advantage of the opportunities it makes available to you.
What Is the "Now Moment'? Trading in the "now moment" means that there is no potential to
associate an opportunity to get into, get out of, add too, or detract from a trade with a past experience
that already exists in your mental environment.

HOW THE FUNDAMENTAL TRUTHS RELATE TO THE SKILLS

1. Anything can happen. Why? Because there are always unknown forces operating in every market at

every moment, it takes only one trader somewhere in the world to negate the positive outcome of your
edge. That's all: only one. Regardless of how much time, effort, or money you've invested in your
analysis, from the market's perspective there are no exceptions to this truth. Any exceptions that may
exist in your mind will be a source of conflict and potentially cause you to perceive market information
as threatening.
2. You don't need to know what is going to happen next in order to make money. Why? Because
there is a random distribution between wins and losses for any given set of variables that define an
edge. (See number 3.) In other words, based on the past performance of your edge, you may know that
out of the next 20 trades, 12 will be winners and 8 will be losers. What you don't know is the sequence
of wins and losses or how much money the market is going to make available on the winning trades.
This truth makes trading a probability or numbers game.
When you really believe that trading is simply a probability game, concepts like right and wrong or win
and lose no longer have the same significance. As a result, your expectations will be in harmony with
the possibilities. Keep in mind that nothing has more potential to cause emotional discord than our
unfulfilled expectations. Emotional pain is the universal response when the outside world expresses
itself in a way that doesn't reflect what we expect or believe to be true. As a result, any market
information that does not confirm our expectations is automatically defined and interpreted as
threatening. That interpretation causes us to adopt a negatively charged, defensive state of mind, where
we end up creating the very experience we are trying to avoid. Market information is only threatening
if you are expecting the market to do something for you.
Otherwise, if you don't expect the market to make you right, you have no reason to be afraid of being
wrong. If you don't expect the market to make you a winner, you have no reason to be afraid of losing.
If you don't expect the market to keep going in your direction indefinitely, there is no reason to leave
money on the table. Finally, if you don't expect to be able to take advantage of every opportunity just
because you perceived it and it presented itself, you have no reason to be afraid of missing out. On the
other hand, if you believe that all you need to know is:
1. the odds are in your favor before you put on a trade;
2. how much it's going to cost to find out if the trade is going to work;
3. you don't need to know what's going to happen next to make money on that trade; and
4. anything can happen;

Then how can the market make you wrong? What information could the market generate about itself
that would cause your pain-avoidance mechanisms to kick in so that you exclude that information from
your awareness? None that I can think of.
If you believe that anything can happen and that you don't need to know what is going to happen next
to make money, then you will always be right. Your expectations will always be in harmony with the
conditions as they exist from the market's perspective, effectively neutralizing your potential to
experience emotional pain. By the same token, how can a losing trade or even a series of losers have
the typical negative effect, if you really believe that trading is a probability or numbers game? If your
edge puts the odds in your favor, then every loss puts you that much closer to a win. When you really
believe this, your response to a losing trade will no longer take on a negative emotional quality.
3. There is a random distribution between wins and losses for any given set of variables that define
an edge.
If every loss puts you that much closer to a win, you will be looking forward to the next occurrence of
your edge, ready and waiting to jump in without the slightest reservation or hesitation. On the other
hand, if you still believe that trading is about analysis or about being right, then after a loss you will
anticipate the occurrence of your next edge with trepidation, wondering if it's going to work. This, in
turn, will cause you to start gathering evidence for or against the trade. You will gather evidence for the
trade if your fear of missing out is greater than your fear of losing. And you will gather information
against the trade if your fear of losing is greater than your fear of missing out. In either case, you will
not be in the most conducive state of mind to produce consistent results.
4. An edge is nothing more than an indication of a higher probability of one thing happening over
another.
Creating consistency requires that you completely accept that trading isn't about hoping, wondering, or
gathering evidence one way or the other to determine if the next trade is going to work. The only
evidence you need to gather is whether the variables you use to define an edge are present at any given
moment. When you use "other" information, outside the parameters of your edge to decide whether you
will take the trade, you are adding random variables to your trading regime.
Adding random variables makes it extremely difficult, if not impossible, to determine what works and
what doesn't. If you're never certain about the viability of your edge, you won't feel too confident about
it. To whatever degree you lack confidence, you will experience fear. The irony is, you will be afraid of

random, inconsistent results, without realizing that your random, inconsistent approach is creating
exactly what you are afraid of. On the other hand, if you believe that an edge is simply a higher
probability of one thing happening over another, and there's a random distribution between wins and
losses for any given set of variables that define an edge, why would you gather "other" evidence for or
against a trade? To a trader operating out of these two beliefs, gathering "other" evidence wouldn't
make any sense.
Or let me put it this way: Gathering "other" evidence makes about as much sense as trying to determine
whether the next flip of a coin will be heads, after the last ten flips came up tails. Regardless of what
evidence you find to support heads coming up, there is still a 50-percent chance that the next flip will
come up tails. By the same token, regardless of how much evidence you gather to support acting or not
acting on a trade, it still only takes one trader somewhere in the world to negate the validity of any, if
not all, of your evidence. The point is why bother! If the market is offering you a legitimate edge,
determine the risk and take the trade.
5. Every moment in the market is unique.
Take a moment and think about the concept of uniqueness. "Unique" means not like anything else that
exists or has ever existed. As much as we may understand the concept of uniqueness, our minds don't
deal with it very well on a practical level. As we have already discussed, our minds are hardwired to
automatically associate (without conscious awareness) anything in the exterior environment that is
similar to anything that is already inside of us in the form of a memory, belief, or attitude. This creates
an inherent contradiction between the way we naturally think about the world and the way the world
exists. No two moments in the external environment will ever exactly duplicate themselves. To do so,
every atom or every molecule would have to be in the exact same position they were in some previous
moment.
Not a very likely possibility. Yet, based on the way our minds are designed to process information, we
will experience the "now moment" in the environment as being exactly the same as some previous
moment as it exists inside our minds. If each moment is like no other, then there's nothing at the level
of your rational experience that can tell you for sure that you "know" what will happen next. So I will
say again, why bother trying to know?! When you try to know, you are, in essence, trying to be right. I
am not implying here that you can't predict what the market will do next and be right, because you
most certainly can. It's in the trying that you run into all of the problems. If you believe that you

correctly predicted the market once, you will naturally try to do it again.
As a result, your mind will automatically start scanning the market for the same pattern, circumstance,
or situation that existed the last time you correctly predicted its movement. When you find it, your state
of mind will make it seem as if everything is exactly as it was the last time. The problem is that, from
the market's perspective, it is not the same. As a result, you are setting yourself up for disappointment.
What separates the best traders from all the rest is that they have trained their minds to believe in the
uniqueness of each moment (although this training usually takes the form of losing several fortunes
before they "really" believe in the concept of uniqueness). This belief acts as a counteracting force,
neutralizing the automatic association mechanism. When you truly believe that each moment is unique,
then by definition there isn't anything in your mind for the association mechanism to link that moment
to. This belief acts as an internal force causing you to disassociate the "now" moment in the market
from any previous moment filed away in your mental environment. The stronger your belief in the
uniqueness of each moment, the lower your potential to associate. The lower your potential to
associate, the more open your mind will be to perceive what the market is offering you from its
perspective.

MOVING TOWARD "THE ZONE"

When you completely accept the psychological realities of the market, you will correspondingly accept
the risks of trading. When you accept the risks of trading, you eliminate the potential to define market
information in painful ways. When you stop defining and interpreting market information in painful
ways, there is nothing for your mind to avoid, nothing to protect against.
When there's nothing to protect against, you will have access to all that you know about the nature of
market movement. Nothing will get blocked, which means you will perceive all the possibilities you
have learned about (objectively), and since your mind is open to a true exchange of energy, you will
quite naturally start discovering other possibilities (edges) that you formerly couldn't perceive. For your
mind to be open to a true exchange of energy, you can't be in a state of knowing or believing that you
already know what's going to happen next. When you are at peace with not knowing what's going to
happen next, you can interact with the market from a perspective where you will be making yourself
available to let the market tell you, from its perspective, what is likely to happen next. At that point,

you will be in the best state of mind to spontaneously enter "the zone," where you are tapped into the
"now moment opportunity flow." CHAPTER 9

CHAPTER 9

THE NATURE OF BELIEFS

At this point, if you can sense the benefits of adopting the five fundamental truths about trading, then
the task is to learn how to properly integrate these truths into your mental system as core beliefs that
are not in conflict with any other beliefs you may hold. At first glance, this may seem like a daunting
task and under other circumstances I would agree with you, but it won't be, because in Chapter 11 I'll
give you a simple trading exercise specifically designed to properly install these truths as beliefs at a
functional level.
A functional level is, one where you find yourself just naturally operating out of a carefree state of
mind, perceiving exactly what you need to do and doing it without hesitation or internal conflict.
However, I do have a word of caution for those of you who have already looked at the exercise. On the
surface, the trading exercise looks so simple that you may be tempted to do it now, before you
thoroughly understand the implications of what you are doing. I strongly suggest that you reconsider.
There are some subtle yet profound dynamics involved in the process of learning how to install new
beliefs and change any existing beliefs that are in conflict with the new ones. Understanding the trading
exercise itself is easy. Understanding how to use the exercise to change your beliefs is another matter
entirely. If you do the exercise without understanding the concepts presented in this chapter and the
next, you will not achieve the desired results. It is also important that you not take for granted the
amount of mental effort you may have to expend to train your mind to fully accept these principles of
success, regardless of how well you understand them. Remember Bob, the CTA who believed he
thoroughly understood the concept of probabilities, but didn't have the ability to function from a
probabilistic perspective. Many people make the mistake of assuming that once they understand
something, the insight inherent in their new understanding automatically becomes a functional part of
their identity.
Most of the time, understanding a concept is only a first step in the process of integrating that concept

at a functional level. This is especially true of concepts that deal with diinking in probabilities. Our
minds are not naturally wired to be "objective" or to stay in the "now moment." This means we have to
actively train our minds to think from these perspectives. In addition to the training involved, there may
be any number of conflicting beliefs to work through. Conflicting beliefs will have the effect of
sabotaging your best intentions to operate from an objective state of mind or to experience the "now
moment opportunity flow." For example, let's say you've spent years learning how to read the markets,
or spent large sums of money developing or buying technical systems, just so you could find out what
was going to happen next.
Now you have come to understand that you don't have to know what's going to happen next, and that
even trying to know will detract from your ability to be objective or to stay in the moment. What we
have is a direct conflict between your old belief that you need to know what will happen next to be
successful and your new understanding that you don't need to know. Now, will your new understanding
suddenly neutralize all the time, money, and energy expended on reinforcing the belief that you "need
to know"? I wish it were that easy. And for some lucky few, it may be. If you will recall in Chapter 4
when I talked about psychological distance in relationship to software code, I said that some traders
may already be so close to these new perspectives that all they need is to put together a few of the
missing pieces to create a mindaltering, "ah, ha" experience. However, based on my experience of
working with well over a thousand traders, I can say that most are not close to these perspectives at all.
For those of you who are not, it may take a considerable amount of mental work (over a considerable
amount of time) to properly integrate your new understandings about trading into your mental
environment.
The good news is that, ultimately, the exercise I present in Chapter 11 will install the five fundamental
truths and resolve many of the potential conflicts, but only if you know exactly what you are doing and
why you are doing it. That is the subject of this and the next chapter.

THE ORIGINS OF A BELIEF

What can we learn about the nature of beliefs, and how can we use that knowledge to create a mind-set
that fosters our desire to be a consistently successful trader? These are the two questions I am going to
focus on answering in this chapter. First, let's look at the origin of our beliefs. As you may recall,

memories, distinctions, and beliefs exist in the form of energy— specifically, structured energy.
Earlier, I lumped these three mental components together to illustrate:

1. that memories, distinctions, and beliefs do not exist as physical matter;
2. that the cause-and-effect relationship that exists between ourselves and the external environment
brings these components into existence; and
3. how the cause-and-effect relationship reverses so that we can perceive in the external environment
what we have learned about.

To get at the origins of our beliefs, we're going to have to unbundle these components to illustrate the
difference between a memory and a belief. The best way to do this is to imagine ourselves in the mind
of an infant. I would think that at the very beginning of a child's life, the memories of his experiences
would exist in their purest form. By that I mean that the memories of what he has seen, heard, smelled,
touched, or tasted exist in his mind as pure sensory information that is not organized or attached to any
specific words or concepts. Therefore, I am going to define a pure memory as sensory information
stored in its original form. A belief, on the other hand, is a concept about the nature of the way the
external environment expresses itself.
A concept combines pure sensory information with a symbol system we call language. For example,
most infants have a pure memory of how it feels to be lovingly nurtured by a parent, but it isn't until the
infant is taught to link or associate certain words with the pure sensory information stored in his
memory that he will form a concept about how it feels to be lovingly nurtured. The phrase "Life is
wonderful" is a concept. By themselves, the words make up a meaningless collection of abstract
symbols. But if a child is either taught or decides to connect these words to his positively charged
feelings of being nurtured, then the letters are no longer a collection of abstract symbols and the words
are no longer an abstract phrase. "Life is wonderful" becomes a definitive distinction about the nature
of existence or the way the world works. By the same token, if the child didn't get enough nurturing,
relative to his needs, he could just as easily link his feelings of emotional pain to a concept like "Life
isn't fair" or "The world is an awful place." In any case, when the positive or negative energy from our
memories or experiences become linked to a set of words we call a concept, the concept becomes
energized and, as a result, is transformed into a belief about the nature of reality. If you consider that

concepts are structured by the framework of a language and energized by our experiences, it becomes
clear why I refer to beliefs as "structured energy."
When a belief comes into existence, what does it do? What is its function? In some ways it seems
ludicrous to ask those questions. After all, we all have beliefs. We are constantly expressing our beliefs
both verbally and through our actions. Furthermore, we are constantly interacting with other peoples
beliefs as they express them. Yet, if I ask, "What exactly does a belief do?" chances are your mind will
go blank. On the other hand, if I were to ask about the functions of your eyes, ears, nose, or teeth, you
would have no problem answering. Since beliefs are such important component parts of our make-up
(in terms of their impact on the quality of our lives), it certainly has to be one of life's great ironies that
they are also the least thought about and understood. What I mean by "least thought about" is, if we
have a problem with one of our body parts, we naturally focus our attention on that part and think about
what we need to do to fix the problem.
However, it doesn't necessarily occur to us that the problems we may be having with the quality of our
lives (for example, lack of happiness, a sense of dissatisfaction, or lack of success in some area) are
rooted in our beliefs. This lack of consideration is a universal phenomenon. One of the prominent
characteristics of beliefs is that they make what we experience seem self evident and beyond question.
In fact, if it weren't for your intense desire to experience consistent success as a trader, it's unlikely you
would be delving into this topic at all. Usually, it takes years of extreme frustration before people begin
examining their beliefs as the source of their difficulties. However, even though beliefs are an intricate
part of our identity, you don't have to take this process of self analysis so personally. Consider the fact
that none of us was born with any of our beliefs. They were all acquired in a combination of ways.
Many of the beliefs that have the most profound impact on our lives were not even acquired by us as an
act of free will. They were instilled by other people.
And it probably won't come as a surprise to anyone that usually the beliefs that cause us the most
difficulty are those that were acquired from others without our conscious consent. By that I mean
beliefs that we acquired when we were too young and uninformed to realize the negative implications
of what we were being taught. Regardless of the source of our beliefs, once they are born into existence
they all basically function in the same way. Beliefs have certain characteristic ways in which they do
their jobs, not unlike the various parts of our bodies.
For example, if you compare my eyes and your eyes, or my hands and your hands, or my red blood

cells and your red blood cells, we can see that they are not exactly the same, but they have
characteristics in common that cause them to function in similar ways. By the same token, a belief that
"Life is wonderful" will perform its function in the same way as a belief that "Life is awful." The
beliefs themselves are different and the effect that each has on the quality of the holder's life will be
vastly different, but both beliefs will function in exactly the same manner.

BELIEFS AND THEIR IMPACT ON OUR LIVES

In the broadest sense, our beliefs shape the way we experience our lives. As I have already said, we're
not born with any of our beliefs. They're acquired, and as they accumulate, we live our lives in a way
that reflects what we have learned to believe. Consider how different your life would be if you had
been born into a culture, religion, or political system that has very little, if anything, in common with
the one you were born into. It might be hard to imagine, but what you would have learned to believe
about the nature of life and how the world works may not be remotely similar to what you currently
believe. Yet you would hold these other beliefs with the same degree of certainty as your current
beliefs.

How Beliefs Shape Our Lives

1. They manage our perception and interpretation of environmental information in a way that is
consistent with what we believe.
2. They create our expectations. Keep in mind that an expectation is a belief projected into some future
moment. Since we can't expect something we don't know about, we could also say that an expectation
is what we know projected into some future moment.
3. Anything we decide to do or any outward expression of behavior will be consistent with what we
believe.
4. Finally, our beliefs shape how we feel about the results of our actions.

There isn't much about the way we function that beliefs don't play a major role in. So what I am going
to do now is give you an example I used in my first book, The Disciplined Trader, to illustrate the

various functions of a belief. In the spring of 1987, I was watching a locally produced television
program called "Gotcha Chicago." It was about some local celebrities who played practical jokes on
one another. In one segment of the program, the TV station hired a man to stand on the sidewalk along
Michigan Avenue holding a sign that read "Free money. Today only." (For those of you who are not
familiar with Chicago, Michigan Avenue is home to many fashionable, exclusive department stores and
boutiques.) The TV station gave the man a considerable amount of cash, with instructions to give
money to anyone who asked for it.
Now, when you consider that Michigan Avenue is one of the busiest areas of the city, and if we assume
that most of the people who passed the man on the street could read the sign, how many people would
you think took him up on his offer and asked for some money? Of all the people who walked by and
read the sign, only one person stopped, and said, "Great! May I have a quarter to buy a bus transfer?"
Otherwise, no one would even go near the man. Eventually, the man grew frustrated because people
weren't reacting the way he expected them to. He started crying out, "Do you want any money? Please
take my money; I can't give it away fast enough." Everyone just kept walking around him as if he didn't
exist. In fact, I noticed that several people went out of their way to avoid him.
As a man wearing a suit and carrying a briefcase approached, he went right up to him and said, "Would
you like some money?" The man responded, "Not today." Really frustrated now, he shot back, "How
many days does this happen? Would you please take this?" as he tried to hand the man some cash. The
man responded with a terse "No" and walked on. What was going on here? Why wouldn't anyone
(except for the person who needed a bus transfer) ask for the money? If we assume that most or all of
the passersby could read the sign, but still didn't make any effort to get the money, then one possible
explanation for their behavior is that they just didn't care about money.
This is extremely unlikely, though, considering how much of our lives is devoted to the pursuit of
money. If we agree that people could read the sign and that money is very important to most of us, then
what could have stopped these people from helping themselves? The environment was making
available an experience that most people would love to have: someone giving them money with no
strings attached. Yet everyone walked by, oblivious to what was awaiting them. They must not have
been able to perceive what was available. That's hard to imagine, because the sign clearly stated "Free
money. Today only." However, it's not hard to imagine if you consider that most people have a belief
(an energized concept about how the world works) that "Free money doesn't exist." If free money really

doesn't exist, then how does someone reconcile the obvious contradiction between that belief and the
sign saying that it does? That's easy, just decide the man with the sign is crazy; what else could account
for such bizarre behavior if, in fact, free money doesn't exist? The reasoning process that could
compensate for the contradiction might go something like this: "Everyone knows getting money with
no strings attached rarely happens.
Certainly not from a stranger on one of the busiest streets in the city. In fact, if the man were really